What is the European Chips Act?

Semiconductor chips are the essential building blocks of digital and digitised products. From smartphones and cars, through critical applications and infrastructures for healthcare, energy, communications and industrial automation, chips are central to the modern digital economy. The COVID-19 pandemic has exposed a weakness in the ecosystem within both Europe and other regions in the world experiencing significant shortages of chips. EU industries manufacture many types of high-tech products, of which chips are essential parts.

Europe must reinforce its capabilities in semiconductors to ensure the future competitiveness and maintain its technological leadership and security of supply. The sector is both capital and knowledge-intensive and chips supply chains are global, complex and currently rely on a few manufacturing sites.

What is Europe’s current situation in the chips market?

Europe has many strengths and some weaknesses in the semiconductor value chain. The semiconductor sector is characterised by intense R&D activity, with first-class companies reinvesting more than 15% of their revenues into research in next-generation technologies. The EU is home to world-leading research and technology organisations and many excellent universities and research institutes spread across the Union. These are pioneering techniques behind the production of some of the world’s most advanced chips.

Moreover, Europe is very well positioned in terms of the materials and equipment needed to run large chip manufacturing plants, with many companies playing essential roles along the supply chain.

Despite these strengths, Europe has an overall global semiconductors production market share of less than 10% and is heavily dependent on third-country suppliers. In case of severe disruption of the global supply chain, Europe’s chips’ reserves in some industrial sectors (e.g. automotive or healthcare devices) could run out in a few weeks, bringing many European industries to a standstill.

As the digital transformation accelerates and penetrates every part of society, industrial needs for chips are set to increase, opening new market opportunities.

What is the European Chips Act package?

The Commission has adopted a Communication, two proposals for a Regulation and a Recommendation. The Communication spells out the European Strategy and rationale behind the package.

The European Parliament and the Member States will now discuss the Commission’s proposals for a Regulation on a European Chips Act in the ordinary legislative procedure. Once adopted, the Regulation will be directly applicable across the EU.

In the meantime, the Member States are encouraged to follow the Recommendation. It sets out a toolbox for monitoring and mitigating disruptions in the chips ecosystem. This includes immediate actions that could be taken if they would be appropriate to help overcome the current shortage before the Regulation enters into force.

How will the European Chips Act address current problems?

The Chips Act is a unique opportunity for Europe to act jointly across all Member States, to the benefit of the whole of Europe. However, the current chips shortage is a systematic issue with no quick fix.

• In the short term, the toolbox set out in the Recommendation will immediately enable the coordination between the Member States and the Commission. This will allow to discuss and decide on timely and proportionate crisis response measures, if considered necessary.
• In the medium term, the Chips Act will strengthen manufacturing activities in the Union and support the scale-up and innovation of the whole value chain, addressing security of supply and a more resilient ecosystem.
• And, in the long-term, it will maintain Europe’s technological leadership while preparing the required technological capabilities that would support transfer of knowledge from the lab to the fab and position Europe as a technology leader in innovative downstream markets.

For a long time, EU has been focusing on growing its semiconductor development and fabrication technologies and production capacities. With the Global chip Shortage, and supply chain crisis triggered by the pandemic, there is now more need to implement plans and strategies to ensure that production of electronic-based companies does not halt further.

In comparison with the US, the EU’s funding looks significantly weaker. Although the top-line figures are similar, the EU’s €43 billion budget includes €30 billion in previously announced investments, while direct funding from the bloc constitutes less than 15 per cent of the total.

Another difficulty will be simply attracting manufacturers. Currently, Taiwanese firm TSMC dominates the semiconductor industry, generating more than half of global revenue. And although there have been reports TSMC is considering setting up a fab in Germany, it’s yet to announce any definite European investments. Meanwhile, the company has confirmed it’s building new plants in the United States and Japan.

The EU Chips Act will build on Europe’s strengths – world-leading research and technology organisations and networks as well as a host of pioneering equipment manufacturers – and address outstanding weaknesses. It will bring about a thriving semiconductor sector from research to production and a resilient supply chain. It will mobilise more than €43 billion euros of public and private investments and set measures to prevent, prepare, anticipate and swiftly respond to any future supply chains disruption, together with the Member States and our international partners. It will enable the EU to reach its ambition to double its current market share to 20% in 2030.

Commission President Ursula von der Leyen said: “The European Chips Act will be a game-changer for the global competitiveness of Europe’s single market. In the short term, it will increase our resilience to future crises, by enabling us to anticipate and avoid supply chain disruptions. And in the mid-term, it will help make Europe an industrial leader in this strategic branch. With the European Chips Act, we are putting out the investments and the strategy. But the key to our success lies in Europe’s innovators, our world-class researchers, in the people who have made our continent prosper through the decades.”